Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

Much ado has been made about whether and when the big U.S. universal banks will have to pull up stakes in London and move to a city still in the European Union, and what it all means for their business prospects across the pond.

But when it comes to bank stocks, the companies with no exposure to Europe have been among the most punished. Regional lenders, many of which only do business in a handful of U.S. states and whose executives only get their passports stamped on vacation, have suffered some of the biggest declines since Britain decided to leave the EU.

Regional Rout

Shares of smaller U.S. lenders took big hits after the U.K. voted to leave the European Union

Source: Bloomberg

Note: Shows three-day price moves (Friday-Tuesday) after Brexit

The stock market's verdict is clear: The most acute damage from Brexit is the flattening of yield curves amid universal expectations that the Federal Reserve will keep interest rates lower for longer.

Waiting on the Fed

The market has pushed its estimation for another interest rate increase well into next year

Source: Bloomberg

The prospect for higher lending margins at banks is like Charlie Brown trying to kick that football -- every time it looks as if he's about to give it the boot, someone yanks the ball away. The yield curve, or difference between rates, on two-year and 10-year Treasuries was already flattening before the vote and reached a nine-year low afterward. The difference between three-month and five-year rates hit a fresh three-year low:

Curve Ball

Yield curves, which had already been flattening, fell further after the Brexit vote and haven't perked up much since

Source: Bloomberg

That's the main issue, but Bank of America added some other concerns on Wednesday when it cut ratings for Comerica, Zions Bancorp, Regions Financial, Texas Capital Bancshares, Synovus Financial and Franklin Financial Network. The surge in the dollar calls into question the recovery in commodity prices, and the political uncertainty could weaken economic and loan growth as well as the potential for mergers and acquisitions.

Also weighing on sentiment is the fact that while the bigger regional banks that are required to undergo Fed stress tests all passed last week's round, many of them scored near the bottom of the class. And that's casting a shadow on the prospects for more generous dividends and buybacks.

Huntington Bancshares, for example, came through the "severely adverse" scenario in the stress test with both its minimum common equity Tier 1 capital ratio and Tier 1 leverage ratio at 5 percent, compared with averages of 8.4 percent and 6.7 percent for all 33 companies that were tested. It scored below average on all four ratios, as did Zions. BB&T, Comerica, Fifth Third and KeyCorp were below average on three of the four ratios tested.

The big boys like JPMorgan Chase, Citigroup and Wells Fargo are also exposed to flattening yield curves, which are used as a proxy to estimate the net interest margins banks earn on loans. But the universal banks with large trading desks could also benefit from higher volumes, in Bank of America's estimation, as well as a flight to quality as investors shy away from banks in the U.K. and Europe. Bank of America doesn't cover itself, of course, but you can read between the lines.

The stock market is rebounding for a second day after the back-to-back plunges following the Brexit vote. Banks are in the lead, with all 24 lenders in the KBW Bank Index rising soon after the open of trading. Meanwhile, yield curves have only picked up slightly from their lows on Monday, if at all.

The 12 percent plunge in the bank index in the two days after the Brexit vote may very well have been an overreaction, and some good news regarding capital-return plans from the Fed after the markets close on Wednesday could help fuel further gains, at least for some banks.

But it's hard to imagine all of that swift carnage in bank stocks being reversed anytime soon without the unlikely cooperation from yield curves.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.